INSIGHT: US chemicals may benefit from ultra-low priced natural gas through H1 ’24

HOUSTON (ICIS)–US chemical producers should continue to benefit from natural gas selling at historically low levels, a trend that has lowered feedstock costs just as their foreign competitors are paying more for oil-based material.

• For the most part, US feedstock costs tend to follow those for natural gas, while those for much of the world follow prices for oil. Right now, US producers are enjoying a sweet spot of elevated oil prices and falling gas prices
• Low gas prices do not reflect the US president’s attempt to pause new LNG permits, since the nation’s export capacity is due to double by the end of 2027 for projects that fall outside of the scope of the pause
• Henry Hub futures do not break $2/MMBtu until July, after which they gradually rise because of summer cooling demand, restocking for winter and the imminent start up of three new LNG export plants in 2025

LOW GAS PRICES
US spot prices for natural gas at Henry Hub are unusually low for the winter. On Wednesday, they closed just above $1.60/MMBtu.

Outside of the COVID pandemic, the last time they dipped below $2/MMBtu in the winter was in 2016. Before that, the last time that winter time gas prices were below $2/MMBtu was at the turn of the millennium.

US CHEMICALS MARGINS SPIKE
US crackers predominantly rely on ethane as a feedstock. Prices for ethane tend to rise and fall with those for natural gas because a certain amount of the material can be burned as fuel.

Indeed, US ethane has been trading below 20 cents/gal for several days.

By contrast, petrochemical prices tend to rise and fall with those for oil because much of the world relies on naphtha as a feedstock.

Brent oil contracts have remained above $75/bbl since late December.

The recent combination of elevated oil prices and low gas prices have increased US contract margins for ethylene, according to ICIS. These rose to $524/tonne for the week ending on 9 February.

With the exception of a single week in 2023, US contract margins for ethylene have not been this high since April 2022, according to ICIS. At that time, Brent crude futures contracts exceeded $100/bbl, and prices for natural gas were above $5.50/MMBtu.

FAVORABLE ETHANE COSTS
US producers know a good deal when they see it. Many of their crackers have the flexibility to consume different feedstock, and they are overwhelmingly favoring ethane over all others.

More than 85% of the ethylene produced in the US uses ethane as a feedstock, according to the latest figures from the American Fuel & Petrochemical Manufacturers (AFPM).

Cracking ethane maximizes ethylene production. If ethane cracking remains favorable, that will increase production of ethylene.

OUTLOOK FOR ETHANE
As low as ethane prices are right now, they have room to fall further.

Ethane can be used as a chemical feedstock or burned as a fuel. Right now, the fuel value of ethane is about 11 cents/gal based on spot prices at the Henry Hub. The fuel value is even lower at other natural gas hubs such as the Houston Ship Channel and Waha hub in the Permian basin in western Texas.

As long as ethane sells at a meaningful premium above its fuel value, the market will have an incentive to recover the material instead of selling at a significant discount to the fuel system. Even if the ethane ends up in storage, it is worth more than ending up as fuel.

Already, US ethane inventories are well above the five-year average because companies have such a large incentive to recover the material. If the trend continues, the US will run out of ethane storage capacity. Prices for ethane would fall.

OUTLOOK FOR NATURAL GAS
The factors that are dragging down natural gas prices should continue through the first half of 2024.

Temperatures remain seasonally mild, which have depressed heating demand.

US production of natural gas remains high because much of it is produced as associated gas from oil wells. Prices for oil remain high enough to support crude production.

Many of these oil wells are in shale basins, so their ratio of gas to oil production increases over time.

As temperatures become warmer, more US consumers will rely on air conditioners to stay cool, and that will increase demand for gas-fuelled power generation.

Further out in 2025, companies will begin operations at new LNG export plants. The following three new LNG projects should begin operations that year. Figures are in millions of tonnes/year.

Project Name	Developer	Project Capacity
Corpus Christi Stage 3	Cheniere	10
Golden Pass NG	Exxon/QatarEnergy	15.6
Plaquemines LNG	Venture Global	20

Source: ICIS LNG Edge

These projects will start up regardless of the fate of the proposed halt in new LNG projects by US President Joe Biden. The projects had already received all of their approvals prior to the proposal, so they will begin operations regardless of whether the US adopts the pause.

Another two LNG projects should start in 2027, as shown below. Figures are in millions of tonnes/year.

Project Name	Developer	Project Capacity
Rio Grande LNG Phase 1	NextDecade	17.6
Port Arthur LNG	Sempra	13

Source: ICIS LNG Edge

Insight by Al Greenwood

Thumbnail shows natural gas. Image by Shutterstock.